Los Angeles County hotel sales plummeted in total dollar volume in 2024 compared to the previous year driven by higher financing costs and increased operational expenses.

The total dollar volume of Los Angeles hotel sales declined 58%, dropping from $1.16 billion in 2023 to nearly $486 million in 2024, according to Atlas Hospitality Group, a Newport Beach-based, a real estate company specializing in acquisition, development and management.

Alan Reay, president of Atlas Hospitality, said the fall is not because California has become a less desirable market.

“When we see this decline in sales, like we’ve seen in the last two years, the big message is that there is a disconnect between what the sellers want to sell for and what the buyers are willing to pay,” Reay said. “Until that gets reset, we’re not going to see a big jump in the number of sales.”

The number of hotel sales in Los Angeles slightly increased in 2024 – 36 properties sold, up from 34 in 2023. The hotel that fetched the highest price in L.A. County was the $68 million paid for the 176-room Residence Inn Manhattan Beach.

Other large hotel sales included the Lüm Hotel in Inglewood which traded hands for $57 million, the Holiday Inn & Suites in Monterey Park which sold for $38 million, and the Motel 6 in North Hills and Extended Stay America in Carson which both sold for $27 million. The two $27 million properties were acquired as part of Project Homekey, a program that turns hotels into permanent supportive housing and interim housing in California.

High financing and labor costs

California hotel sales have been under significant pressure in 2024 driven by higher financing costs and increased operational expenses, particularly in insurance and labor. This has caused some firms in the industry to focus on renovating existing structures.

“There are two issues at play, one is cost-related and the other is hospitality market demand,” noted Britten Shuford, co-founder and managing partner at Santa Monica-based PRG Investment & Management Inc. “The combination of stubbornly high construction costs combined with higher interest rates than we’ve seen in many years has resulted in very muted new hotel construction. On the guest demand side, L.A. was hit with a series of negative shocks over the past five years starting with the pandemic followed by the Hollywood labor strikes and now the L.A. fires, the impact of which on the market is not yet known. The L.A. hospitality market recovery has been sluggish, which is another reason for lack of confidence in new construction.

“We have seen several severely distressed hotel assets in L.A. which are struggling to make their debt service payments and some of these projects are landing in foreclosure,” Shuford continued. “At PRG, we view the risk-return dynamic of new construction to be severely out of balance, we don’t think new construction is warranted in the current environment, which is why we are focusing on renovating existing hotels.  Our approach has been to acquire existing hotels on an all-cash basis (no loan) and pursue projects that are ‘value-add’ in nature.”

Hotel sales down, likely for a while

Substantial drops in hotel sales are usually followed by a larger reduction in median price per room, but that trend did not materialize in 2024, according to a recent survey by Atlas Hospitality. And the group doesn’t expect an uptick in hotel sales anytime soon.

In the past year, lenders have accommodated borrowers by delaying the filing of notices and deferring of payments, Reay said, which has reduced the urgency to sell. There have been price declines, but they have not reached the discounts currently seen in the office market.

Reay believes that hotel sales will be dictated by the banks when they can no longer “kick that can down the road.”

“They’ve worked with their borrowers, but we’re starting to see that time run out,” Reay observed. “For 2025, I expect that we’ll start to see what we’re already seeing in certain markets up in Northern California. We’re seeing some big price reductions from previous sales as high as 75% on one bill. The two largest hotels in San Francisco are being written down by a billion dollars in value.”

Reay believes we’ll likely see similar price reductions in downtown Los Angeles.

“Any market that is reliant upon commercial business, office meetings and conventions, those are the hotels that we’re starting to see have problems. It’s not hit as hard as we’re seeing in Northern California, but I think there’s a lot of loans that are coming due and unless the borrowers have the capability of bringing in more cash, then they’ll have to walk.”

Relief not expected on the horizon

Per the Atlas survey, hotel owners are unlikely to see relief in 2025. Interest rates are expected to remain high and inflation will likely outpace revenue growth.

“I think it’s far more important to get your strategic outline set before significant money is spent these days,” said Alex Kuby, associate principal at Long Beach-based architecture firm DyeLot Interiors, which focuses on interior environments for hospitality. “In terms of Los Angeles, really leaning into the existing fabric of the communities that the properties are in, being a meaningful contribution to a destination rather is another way to put money where it’s most impactful and you see the most return on your investment.”